In two months, eastern Australia lamb prices have pushed through the 700c and 800c/kg cwt mark, leading many to question, is Australia still competitive in the global market?

The answer, in part, is yes. Lamb prices in major exporting and consuming countries have rallied in 2018 and that is on top of consistent year-on-year growth since 2013 – Australia is not alone in this. However, in comparison to competing proteins, global lamb prices do risk being out of reach to many consumers.

A trans-Tasman supply shortage?

Australia and New Zealand account for 70 per cent of this world trade. New Zealand has limited capacity to expand exports due to a declining flock. Pending seasonal conditions, Australia has greater growth potential, particularly in lamb, underpinned by productivity gains and a more stable flock. Nevertheless, neither country is in a position to take on the entire growing global appetite for sheepmeat.

New Zealand slaughter is in the midst of a seasonal trough. Meanwhile, the old-season lamb supply in Australia is ever-shrinking and the onset of the spring lamb crop out of NSW is delayed due to the failed season and spiking grain prices. The two global lamb exporters are short on supply and prices are reacting on both sides of the Tasman. In August, the Australian trade lamb indicator traded at a 7pc premium to its NZ counterpart, on a currency-adjusted basis – a typical premium preceding the onset on new season lamb supplies in Australia.

Working in Australia’s favour with the latest price surge has been broad decline in the A$ over the past decade, making our lamb more affordable on the global market. Eastern trade lamb prices peaked at 677USc/kg in April 2011, but even with the trade lamb indicator finishing last Thursday at a record 878Ac/kg this only equates to 641USc/kg cwt once converted to US currency. However, heavier categories, amid even tighter supply, have surpassed previous records in both Australian and US dollars – the eastern heavy lamb indicator hit 914Ac/kg cwt (or 667USc/kg cwt) on Thursday.

What could derail the market?

While sheepmeat is largely a niche component in diets across the world, its popularity is growing and global consumption is forecast to increase 2pc annually in coming years. The FAO global sheepmeat price index has doubled over the past two years and surged above other proteins, particularly pork and poultry, and there is a risk consumers will begin to push back on price.

And then there’s China: the world’s largest producer, consumer and importer of sheepmeat. Emerging demand from China – in addition to strong demand in traditional markets – has largely underpinned price growth over the past four years, which could be partly reversed if it were to pull back.

The China sheep industry is cyclical in nature – with opportunistic small-scale producers entering and exiting depending on the market. Given 95pc of consumption is domestically produced, small shifts in local supplies can lead to major swings in import demand. However, pre-empting the cycle is difficult due to a broad range of interconnecting drivers – from Chinese government policy on food security and rural development, to ongoing drought and resource constraints in Inner Mongolia.

Sheepmeat demand in China could fall victim to the trade war with the US, a devaluation of the yuan and slowdown in economic growth. The Chinese economy has shown signs of stuttering with the Shanghai stock exchange falling 17pc over the past six months. Given its premium positioning, an economic slowdown would hurt sheepmeat demand.

For now, demand from China has not been affected, with Australian exports to the market up 43pc to record levels (54,600 tonnes swt) in the first seven months of 2018.

What does the future hold?

Australian sheepmeat supply will hinge on the unfolding poor season, and the timing and quality of the new season lamb crop will largely dictate future prices. However, the current Australian lamb market is not too far out of step with major sheepmeat competitor and consumer countries. This largely reflects the limited pool of, particularly high quality, sheepmeat globally and growing demand in key markets. There are risks that could act as brakes but it is likely supply and demand fundamentals will continue to underpin the market over coming years.